[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.71,0:00:03.49,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.26,0:00:11.72,Default,,0000,0000,0000,,- [Alex] In our first talk \Non the price system,
Dialogue: 0,0:00:11.72,0:00:13.74,Default,,0000,0000,0000,,we looked at how markets \Nlink the world,
Dialogue: 0,0:00:13.74,0:00:16.33,Default,,0000,0000,0000,,how markets linked\Nover space, geographically.
Dialogue: 0,0:00:16.51,0:00:18.12,Default,,0000,0000,0000,,Today, we're going to look at how
Dialogue: 0,0:00:18.12,0:00:20.44,Default,,0000,0000,0000,,different markets are linked \Nto one another,
Dialogue: 0,0:00:20.44,0:00:23.45,Default,,0000,0000,0000,,and this is going to give us\Na lot of insight into how markets
Dialogue: 0,0:00:23.45,0:00:26.44,Default,,0000,0000,0000,,solve the great economic problem.
Dialogue: 0,0:00:30.55,0:00:35.08,Default,,0000,0000,0000,,Earlier, we looked at how the price \Nof oil affects the market for roses.
Dialogue: 0,0:00:35.08,0:00:36.77,Default,,0000,0000,0000,,Here's another example:
Dialogue: 0,0:00:36.77,0:00:39.68,Default,,0000,0000,0000,,How does the price \Nof oil affect candy bars?
Dialogue: 0,0:00:39.97,0:00:42.85,Default,,0000,0000,0000,,Well, there's one obvious way \Nin which these are connected.
Dialogue: 0,0:00:42.99,0:00:46.33,Default,,0000,0000,0000,,A higher price of oil leads \Nto higher transportation costs,
Dialogue: 0,0:00:46.33,0:00:48.46,Default,,0000,0000,0000,,and anything you transport \Ntherefore becomes
Dialogue: 0,0:00:48.46,0:00:50.16,Default,,0000,0000,0000,,a little bit more expensive.
Dialogue: 0,0:00:50.33,0:00:52.77,Default,,0000,0000,0000,,But what I have in mind is\Nactually a more subtle
Dialogue: 0,0:00:52.77,0:00:54.38,Default,,0000,0000,0000,,and important connection.
Dialogue: 0,0:00:54.38,0:00:56.82,Default,,0000,0000,0000,,Can you guess what it might be\Nfrom the picture?
Dialogue: 0,0:00:57.66,0:01:02.36,Default,,0000,0000,0000,,Higher oil prices increase \Nthe demand for substitutes
Dialogue: 0,0:01:02.36,0:01:04.25,Default,,0000,0000,0000,,such as ethanol.
Dialogue: 0,0:01:04.53,0:01:08.01,Default,,0000,0000,0000,,In the United States, \Nethanol is mostly made from corn.
Dialogue: 0,0:01:08.01,0:01:11.17,Default,,0000,0000,0000,,But in most of the rest \Nof the world, including Brazil,
Dialogue: 0,0:01:11.17,0:01:13.34,Default,,0000,0000,0000,,it's made from sugar cane.
Dialogue: 0,0:01:13.74,0:01:18.19,Default,,0000,0000,0000,,Higher oil prices mean \Nthat more of the sugar cane crop is
Dialogue: 0,0:01:18.19,0:01:20.97,Default,,0000,0000,0000,,going to be diverted \Ninto producing ethanol,
Dialogue: 0,0:01:20.97,0:01:24.78,Default,,0000,0000,0000,,and less of it is going \Nto be used to produce sugar.
Dialogue: 0,0:01:25.19,0:01:27.78,Default,,0000,0000,0000,,That means a reduced \Nsupply of sugar.
Dialogue: 0,0:01:28.32,0:01:31.77,Default,,0000,0000,0000,,That means an increase \Nin the price of sugar,
Dialogue: 0,0:01:31.77,0:01:36.03,Default,,0000,0000,0000,,and that increases the cost \Nof producing candy bars.
Dialogue: 0,0:01:36.62,0:01:39.71,Default,,0000,0000,0000,,Who would have thought \Nthat one way of adjusting
Dialogue: 0,0:01:39.71,0:01:44.12,Default,,0000,0000,0000,,to a higher price of oil is \Nto eat fewer candy bars?
Dialogue: 0,0:01:44.12,0:01:47.87,Default,,0000,0000,0000,,Yet that is exactly\Nhow the price system works.
Dialogue: 0,0:01:48.40,0:01:52.25,Default,,0000,0000,0000,,A change in the price \Nof one resource ripples out
Dialogue: 0,0:01:52.25,0:01:56.18,Default,,0000,0000,0000,,throughout the world economy,\Nchanging the consumption patterns
Dialogue: 0,0:01:56.18,0:01:57.89,Default,,0000,0000,0000,,of many, many different goods
Dialogue: 0,0:01:57.89,0:02:00.49,Default,,0000,0000,0000,,in first, second, \Nand third order effects.
Dialogue: 0,0:02:00.93,0:02:06.14,Default,,0000,0000,0000,,All in order to try and find \Nthe best way of responding
Dialogue: 0,0:02:06.14,0:02:08.68,Default,,0000,0000,0000,,to this reduced amount \Nof the resource.
Dialogue: 0,0:02:09.21,0:02:11.58,Default,,0000,0000,0000,,How do we adjust to less?
Dialogue: 0,0:02:11.58,0:02:14.91,Default,,0000,0000,0000,,We adjust on many,\Nmany different margins,
Dialogue: 0,0:02:14.91,0:02:17.40,Default,,0000,0000,0000,,all working\Nthrough the price system.
Dialogue: 0,0:02:17.78,0:02:20.50,Default,,0000,0000,0000,,Here's another example \Nof how a change in the price
Dialogue: 0,0:02:20.50,0:02:24.22,Default,,0000,0000,0000,,in one market ripples out \Nthroughout the world economy,
Dialogue: 0,0:02:24.22,0:02:27.47,Default,,0000,0000,0000,,changing prices, consumption \Nand production decisions,
Dialogue: 0,0:02:27.47,0:02:31.06,Default,,0000,0000,0000,,incentives, and choices \Nthroughout the entire world.
Dialogue: 0,0:02:31.68,0:02:34.53,Default,,0000,0000,0000,,We're going to show how \Nthe price of oil affects
Dialogue: 0,0:02:34.53,0:02:36.56,Default,,0000,0000,0000,,how driveways are built.
Dialogue: 0,0:02:36.56,0:02:39.54,Default,,0000,0000,0000,,A barrel of oil is refined \Ninto gasoline but also
Dialogue: 0,0:02:39.54,0:02:40.98,Default,,0000,0000,0000,,into many other products,
Dialogue: 0,0:02:40.98,0:02:44.82,Default,,0000,0000,0000,,such as jet fuel, lubricants,\Nand also asphalt.
Dialogue: 0,0:02:45.03,0:02:47.44,Default,,0000,0000,0000,,Asphalt, in fact, is \Nwhat's left over
Dialogue: 0,0:02:47.44,0:02:50.23,Default,,0000,0000,0000,,after the other products\Nhave been extracted.
Dialogue: 0,0:02:50.45,0:02:56.16,Default,,0000,0000,0000,,Within limits, refiners can choose \Nhow much of each product to extract.
Dialogue: 0,0:02:56.58,0:03:00.90,Default,,0000,0000,0000,,A higher price of gasoline will\Ncause refiners to work extra hard
Dialogue: 0,0:03:00.90,0:03:04.69,Default,,0000,0000,0000,,to extract more gasoline\Nfrom a given barrel
Dialogue: 0,0:03:04.69,0:03:06.56,Default,,0000,0000,0000,,than they otherwise would.
Dialogue: 0,0:03:06.86,0:03:10.15,Default,,0000,0000,0000,,This means as they extract \Nmore gasoline, there's less
Dialogue: 0,0:03:10.15,0:03:14.26,Default,,0000,0000,0000,,production of asphalt, and that \Nmeans a higher price of asphalt.
Dialogue: 0,0:03:14.84,0:03:17.81,Default,,0000,0000,0000,,So, when someone is thinking \Nabout how to pave their driveway,
Dialogue: 0,0:03:17.81,0:03:20.55,Default,,0000,0000,0000,,they're going to see \Nthe higher price of asphalt.
Dialogue: 0,0:03:20.55,0:03:25.50,Default,,0000,0000,0000,,So, they're going to use, instead, \Nconcrete, cobblestone or brick,
Dialogue: 0,0:03:25.83,0:03:27.69,Default,,0000,0000,0000,,one of the substitutes.
Dialogue: 0,0:03:28.46,0:03:33.03,Default,,0000,0000,0000,,Who would have thought that \Nconcrete is a substitute for oil?
Dialogue: 0,0:03:33.26,0:03:34.90,Default,,0000,0000,0000,,Yet, in fact, it is.
Dialogue: 0,0:03:35.11,0:03:37.68,Default,,0000,0000,0000,,That's what the market system does.
Dialogue: 0,0:03:37.99,0:03:41.94,Default,,0000,0000,0000,,It causes us to rearrange \Nour choices in order to get
Dialogue: 0,0:03:41.94,0:03:45.65,Default,,0000,0000,0000,,the most value from our\Nresources, and that may involve
Dialogue: 0,0:03:45.65,0:03:49.13,Default,,0000,0000,0000,,substituting concrete for oil.
Dialogue: 0,0:03:49.59,0:03:51.67,Default,,0000,0000,0000,,So, here's the big picture.
Dialogue: 0,0:03:51.67,0:03:54.90,Default,,0000,0000,0000,,The great economic problem \Nis how to arrange
Dialogue: 0,0:03:54.90,0:03:59.84,Default,,0000,0000,0000,,our limited resources to satisfy\Nas many of our wants as possible.
Dialogue: 0,0:03:59.84,0:04:03.23,Default,,0000,0000,0000,,Resources are not equally \Nvaluable in all uses,
Dialogue: 0,0:04:03.23,0:04:08.10,Default,,0000,0000,0000,,so we must choose where to allocate\Nour resources in order
Dialogue: 0,0:04:08.10,0:04:11.98,Default,,0000,0000,0000,,to get the most value \Nout of those resources.
Dialogue: 0,0:04:12.53,0:04:16.93,Default,,0000,0000,0000,,If the supply of oil falls, \Nwe want oil to be shifted
Dialogue: 0,0:04:16.93,0:04:20.21,Default,,0000,0000,0000,,to higher valued uses, \Nbut which uses?
Dialogue: 0,0:04:20.48,0:04:23.51,Default,,0000,0000,0000,,How are we going to choose\Nwhere to use less oil?
Dialogue: 0,0:04:23.92,0:04:26.92,Default,,0000,0000,0000,,We must use less oil \Nsomewhere, but where?
Dialogue: 0,0:04:27.28,0:04:30.78,Default,,0000,0000,0000,,And how are we going \Nto make these decisions?
Dialogue: 0,0:04:31.58,0:04:34.12,Default,,0000,0000,0000,,There are a couple \Nof possible methods.
Dialogue: 0,0:04:34.38,0:04:39.26,Default,,0000,0000,0000,,We could use a central planner,\Nor we could use the price system.
Dialogue: 0,0:04:39.99,0:04:43.37,Default,,0000,0000,0000,,One way of solving \Nthe great economic problem is
Dialogue: 0,0:04:43.37,0:04:44.96,Default,,0000,0000,0000,,through central planning.
Dialogue: 0,0:04:44.96,0:04:49.43,Default,,0000,0000,0000,,Make a single official, a czar, \Nor a bureaucracy, responsible
Dialogue: 0,0:04:49.43,0:04:53.52,Default,,0000,0000,0000,,for allocating our limited resources \Nto all the different uses.
Dialogue: 0,0:04:53.88,0:04:56.44,Default,,0000,0000,0000,,This was the approach taken \Nin communist countries
Dialogue: 0,0:04:56.44,0:04:58.39,Default,,0000,0000,0000,,in centrally planned economies.
Dialogue: 0,0:04:58.39,0:05:01.97,Default,,0000,0000,0000,,Does it work? \NIt's got big, big problems --
Dialogue: 0,0:05:02.42,0:05:06.41,Default,,0000,0000,0000,,problems of information \Nand problems of incentives.
Dialogue: 0,0:05:06.93,0:05:09.17,Default,,0000,0000,0000,,Let's look at information first.
Dialogue: 0,0:05:09.39,0:05:11.91,Default,,0000,0000,0000,,Think about all \Nof the different uses of oil.
Dialogue: 0,0:05:11.91,0:05:16.20,Default,,0000,0000,0000,,Oil is used for producing steel \Nand is used for growing vegetables.
Dialogue: 0,0:05:16.31,0:05:19.80,Default,,0000,0000,0000,,If we have less oil, which one \Ndo we cut back most on --
Dialogue: 0,0:05:19.80,0:05:22.25,Default,,0000,0000,0000,,on steel or on vegetables?
Dialogue: 0,0:05:22.59,0:05:24.03,Default,,0000,0000,0000,,You might think that's easy
Dialogue: 0,0:05:24.03,0:05:26.70,Default,,0000,0000,0000,,because maybe steel is \Nworth more than vegetables.
Dialogue: 0,0:05:26.85,0:05:29.66,Default,,0000,0000,0000,,Maybe, but even if that is true,
Dialogue: 0,0:05:29.78,0:05:32.14,Default,,0000,0000,0000,,perhaps there are \Nreally good substitutes
Dialogue: 0,0:05:32.14,0:05:35.09,Default,,0000,0000,0000,,for oil in its use \Nin producing steel,
Dialogue: 0,0:05:35.26,0:05:39.96,Default,,0000,0000,0000,,but no good substitutes for oil \Nin its use in producing vegetables.
Dialogue: 0,0:05:40.21,0:05:43.77,Default,,0000,0000,0000,,In that case, we would want \Nto cut back on steel
Dialogue: 0,0:05:43.77,0:05:46.69,Default,,0000,0000,0000,,and continue to use oil \Nfor vegetables.
Dialogue: 0,0:05:47.28,0:05:49.84,Default,,0000,0000,0000,,Think about all of the different \Nresponses we've seen
Dialogue: 0,0:05:49.84,0:05:51.82,Default,,0000,0000,0000,,to an increase in the price of oil.
Dialogue: 0,0:05:51.89,0:05:55.87,Default,,0000,0000,0000,,People use less sugar, they had \Nfewer candy bars, they cut back
Dialogue: 0,0:05:55.87,0:05:59.68,Default,,0000,0000,0000,,on asphalt and switched to paving \Ntheir streets and their driveways
Dialogue: 0,0:05:59.68,0:06:01.93,Default,,0000,0000,0000,,with concrete and brick.
Dialogue: 0,0:06:02.13,0:06:05.43,Default,,0000,0000,0000,,Could any bureaucracy,\Neven a large bureaucracy
Dialogue: 0,0:06:05.43,0:06:09.70,Default,,0000,0000,0000,,with massive computing power --\Ncould it know all of the many,
Dialogue: 0,0:06:09.70,0:06:13.45,Default,,0000,0000,0000,,many uses of oil and all \Nof the substitutes for those uses?
Dialogue: 0,0:06:13.55,0:06:15.67,Default,,0000,0000,0000,,And the substitutes \Nfor the substitutes?
Dialogue: 0,0:06:16.04,0:06:19.25,Default,,0000,0000,0000,,Could it make all \Nof these subtle choices
Dialogue: 0,0:06:19.25,0:06:22.21,Default,,0000,0000,0000,,that we've seen\Nthat the market makes?
Dialogue: 0,0:06:22.29,0:06:24.45,Default,,0000,0000,0000,,It's highly unlikely.
Dialogue: 0,0:06:24.77,0:06:27.53,Default,,0000,0000,0000,,The information problem \Nis too difficult,
Dialogue: 0,0:06:27.53,0:06:30.71,Default,,0000,0000,0000,,even for massive \Ncomputing power to solve.
Dialogue: 0,0:06:31.44,0:06:35.61,Default,,0000,0000,0000,,Moreover, even if we could \Ngather all of this information,
Dialogue: 0,0:06:35.62,0:06:37.32,Default,,0000,0000,0000,,this dispersed information
Dialogue: 0,0:06:37.32,0:06:40.72,Default,,0000,0000,0000,,for millions and millions \Nof people, and even if we could
Dialogue: 0,0:06:40.72,0:06:44.20,Default,,0000,0000,0000,,compute the right thing to do \Nwith all of that information,
Dialogue: 0,0:06:44.20,0:06:48.21,Default,,0000,0000,0000,,would anyone have the incentive \Nto do the right thing?
Dialogue: 0,0:06:48.72,0:06:51.30,Default,,0000,0000,0000,,Would people have \Nthe right incentive to respond
Dialogue: 0,0:06:51.30,0:06:53.53,Default,,0000,0000,0000,,to the bureaucracy with the truth?
Dialogue: 0,0:06:53.72,0:06:57.55,Default,,0000,0000,0000,,No, everyone's going to say, \N"My use is really valuable.
Dialogue: 0,0:06:57.55,0:06:59.08,Default,,0000,0000,0000,,It's the most valuable use.
Dialogue: 0,0:06:59.08,0:07:02.46,Default,,0000,0000,0000,,There are not good substitutes \Nfor oil in my use."
Dialogue: 0,0:07:02.67,0:07:06.00,Default,,0000,0000,0000,,Even if their use happens to be\Nheating their swimming pool.
Dialogue: 0,0:07:06.38,0:07:10.07,Default,,0000,0000,0000,,We saw, in fact, what happened \Nin the United States
Dialogue: 0,0:07:10.07,0:07:12.89,Default,,0000,0000,0000,,when the Department of Energy \Ntried to centrally plan
Dialogue: 0,0:07:12.89,0:07:15.60,Default,,0000,0000,0000,,the allocation of oil in the 1970s.
Dialogue: 0,0:07:15.69,0:07:19.66,Default,,0000,0000,0000,,We had oil rigs off the coast \Nof California which could not
Dialogue: 0,0:07:19.66,0:07:22.16,Default,,0000,0000,0000,,themselves get \Nenough oil to operate.
Dialogue: 0,0:07:23.54,0:07:26.52,Default,,0000,0000,0000,,In other words, \Nunder central planning of oil,
Dialogue: 0,0:07:26.55,0:07:30.65,Default,,0000,0000,0000,,we had massive inefficiencies \Nand misallocation of resources.
Dialogue: 0,0:07:30.98,0:07:34.73,Default,,0000,0000,0000,,We saw exactly the same \Nmisallocation of resources
Dialogue: 0,0:07:34.73,0:07:39.17,Default,,0000,0000,0000,,on a larger scale in the command \Neconomies, such as the Soviet Union
Dialogue: 0,0:07:39.17,0:07:42.83,Default,,0000,0000,0000,,under communism, \Nor China under communism.
Dialogue: 0,0:07:43.46,0:07:45.92,Default,,0000,0000,0000,,Central planning is not \Na good solution
Dialogue: 0,0:07:45.92,0:07:48.13,Default,,0000,0000,0000,,to the great economic problem
Dialogue: 0,0:07:48.13,0:07:51.50,Default,,0000,0000,0000,,because of problems \Nof information and incentives.
Dialogue: 0,0:07:51.50,0:07:53.38,Default,,0000,0000,0000,,We need a better approach.
Dialogue: 0,0:07:59.21,0:08:03.06,Default,,0000,0000,0000,,- [Narrator] If you want to test \Nyourself, click "Practice Questions."
Dialogue: 0,0:08:03.42,0:08:07.02,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click "Next Video."
Dialogue: 0,0:08:07.97,0:08:10.14,Default,,0000,0000,0000,,♪ [music] ♪